Buying a new house, whether your first home or your fifth, is a financial milestone for anyone. This major purchase can set you back big bucks, but being a homeowner can also save your plenty on your taxes. Tax laws designed to encourage home ownership give you tax breaks that make home-owning more affordable. If you itemize deductions, you can take advantage of tax laws regarding the purchase of a new house. Keep careful records to justify your deductions.
Mortgage Interest Deductions
If you itemize deductions, you can deduct the interest portion of your mortgage payments for a first or second home, as well as interest you pay on a home equity line of credit, second mortgage or other debt secured by your home. Your mortgage holder should supply you with a 1099 at the end of the year to show how much mortgage interest you paid during the year. For most people, mortgage interest is their largest single deduction.
When you buy a new home, you may pay a percentage of the home’s price in order to receive a lower interest rate. This percentage, known as "points," is really pre-paid interest on your loan. You can deduct points from your income tax as an interest deduction, but you can’t deduct all the points all at once. Instead, you have to deduct the points over the life of the loan. However, if you pay points on a loan for a house that is your primary residence, and if charging points is customary for mortgage loans in your area, you may be able to deduct the full value of the points in the year you pay them. You can still deduct points over the life of the loan if this is more advantageous in your tax situation.
Real Estate Taxes
If you itemize your deductions, you can also deduct the cost of any real estate taxes assessed on your home. This includes any taxes you prepay at the loan closing. One exception is any taxes you pay for a direct benefit to your property. For example, if your county paves the street in front of your house, then assesses a tax each year for ten years on your home in order to reimburse the county the cost of the paving, that assessment isn’t deductible on your taxes, even though it may be part of your real estate tax bill.
If you make a lower down payment on your home, your mortgage holder may require you to pay for mortgage insurance. Mortgage insurance helps protect the mortgage company if you default on the loan. You may deduct the premiums you pay for mortgage insurance from your taxes, if you itemize deductions. If you’re married filing jointly and your adjusted gross income is more than $100,000 a year, as of 2012, you may not be able to deduct all of the interest. The higher your adjusted gross income is, the less mortgage insurance you may deduct.
Home Buyer Credit
You may have heard that first-time homebuyers can get a credit on their taxes for buying a new home. However, this credit ended September 30, 2010, and as of this writing has not been extended.
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